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How is the global economy interconnected?

Wassily Leontief witnessed history. He was a young boy when his country mourned the death of Leo Tolstoy. He saw Lenin speaking to a crowd in front of the Winter Palace. As a young academic, he decided to leave Russia to escape censorship and eventually moved to the United States to further develop what would become his most important contribution to economics, the input-output-analysis. Before the age of computers, Leontief started mapping the flow of goods and services between different economic sectors, which proved to be crucial in learning more about how economies interconnect through global supply chains. Today, his models are still vital to our understanding of the economy.

Wassily W. Leontief

At a glance

Prize-winning work: Development of the input-output analysis, a method to systematically analyze inter-industry transactions in an economy

Taking chances: Was offered work as an advisor to the Ministry of Railroad Services in Nanking after having a beer with some Chinese gentlemen in a Berlin pub

Travel lover: Chose the slowest way possible to travel to China in the 1920s. He took a Japanese boat from Marseilles

Passing on the success: Four of his doctoral students have also been Nobel Prize winners. Paul Samuelson, Robert Solow, Vernon Smith and Thomas Schelling

In the middle of a revolution

Leontief was only 10 years old when the Russian Revolution began with the replacement of the Czarist regime by a provisional government. He lived in Leningrad, present-day St. Petersburg, and, even as an old man, he still remembered playing with his friends in the streets and watching bullets go by. He shared vivid memories of insufferable hunger and a home with no heat.

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Politically, it wasn’t an easy time for the family. Leontief’s father, a professor of economics who had studied in Germany, opposed what was happening in Russia, as did Leontief himself. "There was a great tension," he remembered. "I was definitely on the protesting side. I protested with fellow students against censorship. We printed leaflets and at night we went pasting them on walls in the city."

A passionate reader, Leontief took his first steps towards an academic career in the midst of turbulent times. He was given special permission to be admitted to university early and began studying philosophy, sociology and economics. He earned a master’s degree in 1924, when he was only 19 years old.

The first steps towards an academic career

Leontief soon realized he wouldn’t be able to develop a scientific career in his home country. Censors prohibited the publication of his academic articles because he’d campaigned for freedom of speech and institutional autonomy.

In 1925, he left for Germany before landing in the United States. At the Institute for the World Economy in Kiel, he had engaged mostly in statistical work on supply and demand curves. At Harvard University, he took a different approach. "To study little pieces, to use very fancy statistical measures, you never understand the economy,” he said. “One must get the facts, and I developed a theory of how to analyze it."

The economic system of a country is like a big computing machine and very often computers break down.

How do different industries affect each other?

In general, Leontief’s approach sought to answer the question of how economic sectors’ activities affect each other. "With input-output analysis, we try to describe what happens in an economy,” he said. “We show how products are distributed.” He was able to depict, for the first time in economic history, how all the different industries are interconnected, how they sell and buy from each other.

An economy is like a big computing machine

"Imagine you have an economy which consists of two sectors, agriculture and manufacturing,” said Leontief. “You also have final consumption, households. If you have to deliver more to households, you have to increase output. And you can compute how much more additional products you need. It’s a complete system."

Leontief understood that his theories could give false answers when used to make literal predictions however.

"There are time lags,” he said. “It’s a problem of synchronization. That’s why much of the modern theory of the business cycle doesn’t involve the input-output table exactly. It’s an extremely complicated system."

Nevertheless, his approach to economic interconnections became increasingly important over time. To this day, it is a method every economics student must learn and a useful tool for institutions such as the World Bank or the United Nations.

How to help developing countries?

Much of Leontief’s work was devoted to the question of how to make his research useable for developing countries. In the 1970s, the UN asked for his expertise. "They came to me and asked to help with a report on how one could help less developed countries,” he said. “They thought that I would just write a nice report that they can put on the shelf and I said no."

Why you need the rudder and the wind to get you somewhere

The study he led was titled "The future of the world economy" and it proposed alternative paths for future developments. Leontief showed how industrialized countries could reduce the production of arms and use some of the saved resources to help developing countries. The basis for his analysis was, not surprisingly, the computation of an input-output-table.

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Looking at the big picture in all its details

Though Leontief became known as a theoretical economist, he felt strongly that theory was simply an instrument to approach reality and that many of his fellow economists didn’t pay enough attention to the collection of data. "Unfortunately, instead of collecting data, we make assumptions,” he said. “Instead of looking at figures, we say let’s assume. Then of course, you get something that has no relation to reality.”

While he was a mathematical genius, Leontief also enjoyed the arts, music, traveling and reading. He was a political person all his life, caring for the less fortunate and hoping that the international relationship would improve. "Hostility between Russia and America splits the entire world,” he said. “It’s ridiculous."

When asked what advice he would share after having lived such a long and fruitful life he answered, "Don’t be afraid. Don’t compromise too much and pursue what you think it’s right." Without a doubt, he clearly followed his own advice.

Do you think the economy can be modeled off of computer programming and theories?

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Yes. The economy is one big computer.

No. The natural world and humans do not operate like machines.

Why do countries have to find better ways to grow?

Hear Michael Spence's view on how countries can grow sustainably while having a long-lasting positive impact.

What does Leontief's work mean for us?

"Leontief’s Nobel Laureate was awarded for creating input-output models, work he started in the 1930s. The importance of these models has increased over time and today they are vital to understanding the global economy."

Paul Donovan Global Chief Economist UBS Wealth Management

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